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FRM Part II · FRM Exam Part II · Netting, Close-out and Related Aspects

Bank B and Fund F have two netting sets under separate master agreements. Netting set 1 has a net value of +20 million to Bank B; netting set 2 has a net value of -8 million to Bank B. Each set is enforceable only within itself, with no cross-product netting. F defaults and no collateral exists. What is Bank B's exposure, and how much would it be if both sets sat under one enforceable agreement?

Exposure is 20 million with separate netting sets, because the negative 8 million set cannot offset the positive 20 million set. Under a single enforceable agreement the values combine to 12 million, showing the extra reduction from broadening the netting set.

  1. A20 million separately; 12 million under one agreementCorrect
  2. B12 million separately; 12 million under one agreement
  3. C28 million separately; 20 million under one agreement
  4. D20 million separately; 20 million under one agreement

Explanation

Separate sets: exposure is the sum of positive net set values, so 20 + 0 = 20 million, since the -8 million set is owed by B and not offset. Under one agreement: 20 - 8 = 12 million. Option 2 nets across sets in both cases; option 3 adds absolute values.

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